Engineering at Brex, Apple, Microsoft. I write about fintech, crypto and China
As of July 2019, the world’s most valuable unicorn (a private company valued at $1 billion or more) is not Airbnb, Instacart or Doordash. It’s a name that many in the western world have yet to know: Ant Financial. According to Crunchbase, this Chinese financial services company spun off from Alibaba is valued at approximately $150 billion.
Ant Financial’s initial product was Alipay, a payment-processing service started in 2004 by Alibaba, the world's largest retailer and e-commerce company. Today, Ant Financial has a suite of services aimed at providing “inclusive finance” to the Chinese masses: mobile payments, savings accounts, personal investing, lending, and credit scoring.
This article features some highlights from a Chinese book about Ant Financial by You Xi (2017). This is not just a story about financial services juggernauts, but also an illustration of how Chinese technology companies changed how its people spend, save and invest money.
Ant Financial’s trademark product is Alipay. At its inception in 2004, Alipay’s purpose was to enable a trustworthy payment system for Taobao, Alibaba’s e-commerce website. On Taobao, small businesses and individual “shop owners” can set up online stores to sell directly to end consumers. Taobao was renamed to TMall in 2012, and on Singles' Day in 2016 (a Chinese shopping holiday to celebrate pride in being single), TMall processed 1.5 billion orders.
One of Alipay’s original features is secure online payments. It was built to address the problem of trust among Taobao users.
Image: Taobao Homepage
In 2003, eBay announced its plan to enter the Chinese market, which triggered the eminent Alibaba founder Jack Ma. Initially focused on B2B, Ma’s counterattack was to go after the consumer e-commerce space. He ordered the creation of a focus group whose only job was to create a consumer e-commerce platform in the shortest time possible.
When Taobao first launched, user activity was high but there were very few transactions. This was due to a lack of trust between sellers and buyers. Back then, buyers had to place orders online by paying sellers directly and meet in real-life to exchange goods. Many users found this sketchy, and it was nearly impossible for buyers and sellers in different regions to transact.
After learning about Paypal’s payment processing system, the Taobao team came up with an escrow mechanism in which a buyer places an order and sends the money to a Taobao bank account. Once the buyer receives the merchandise, Taobao releases the payment to the seller. This was known as “custodial transactions” (担保交易). At first, this practice was risky because Taobao didn’t have the license to perform these transfers at scale. Facing the risk of legal ramifications and backlash from banks, Jack Ma insisted on deploying the secure payment system, because it was key to increasing transactions on Taobao. He said, “if someone has to go to jail, I’ll go.”
When the custodial transactions feature was deployed in 2003, transaction volumes increased, but so did error rates. Perhaps the largest bottleneck in this process was an antiquated banking system with bureaucratic processes: employees were required to manually fill the transfer orders from Taobao’s account to the sellers. This sparked Alibaba’s collaboration with Chinese banks to build the infrastructure for bridging online payments with online banking.
During the first half of 2005, transaction volumes on Taobao surged, especially during sales events. The bank that Taobao partnered with for custodial transactions was the Commercial Bank of China. They complained, “this Taobao thing is exhausting us!”
Many of Taobao’s sellers don’t have bank accounts with the Commercial Bank of China. So when a buyer makes a payment via Alipay, the amount first goes into Taobao’s account in the CBC. After that, the funds need to be transferred to the seller’s account. Regardless of the seller’s bank, the transfer must first pass through another financial institution, the People’s Bank of China. These procedures involved manual paperwork and certificates. This was an inefficient cycle that left all parties frustrated.
It became clear that a new system needed to be built to scale payments on Chinese websites. The Alipay team joined forces with the Commercial Bank of China to build an online version of the custodial transaction pipeline. They also invited experts from Sun Microsystems to develop this new payment processing infrastructure. Alipay sits at the frontend with the initial payment gateway and account verification. It then sends the payment data to the bank’s network, which verifies that the user has enough balance and processes the rest of the transaction. Alipay was lucky that a prominent, traditional Chinese financial institution was willing to collaborate with them. Eventually, more major banks such as China Merchants Bank and China Construction Bank would join the network.
By 2010, Alipay had established connections with 200+ banks in China. Another key feature was facilitating checkouts via “quick payments” (快捷支付). It would allow users to perform one-time identity verification for much faster subsequent checkouts. Before this, users had to go to their online banking portal to make a transfer to Taobao. The quick payments feature captures the user’s credit card and ID information to verify their identity. Once verified, the bank account becomes tied to the user’s Alipay account and transactions can be completed with just a password or text message.
On the forums, Taobao users expressed interest in keeping their balances stored on the platform since they might use them to make purchases again. This sparked the possibility of virtual accounts. Another benefit of keeping money on Alipay is that transactions can be frictionless, reducing the operational load for Taobao as well as fees. Having an account with a balance also invites users to return to the website more often. The introduction of virtual accounts paved the way for more financial services by Alipay and its parent company, Ant Financial.
A critical product in Ant Financial’s history is Yu’ebao (余额宝), which is the feature that allows users to invest their remaining balances on Alipay. Launched in 2013, Yu’ebao represents a shift from Alipay to the greater Ant Financial: from sheer online payments to a series of financial products.
Users can use Yu’ebao to purchase shares of the Tianhong Fund, which makes low-risk investments in Chinese money markets for annual returns of about 3.5%. Earnings from Yu’ebao can instantly be transferred or used to make online purchases. It is currently the world’s largest money market fund.
The proof of concept for Yu’ebao started in 2011 when Taobao aimed to start selling investment products. Tianhong Fund used to be a no-name fund in China, but they also happened to be interested in developing investment products to be sold on the internet. Brought together by the same goal, the two started a collaboration so that Tianhong could sell its products on Alipay and Alipay could allow its users to invest their account balances.
Ant Financial’s history is full of “focus sprints” where teams are assembled and placed in a fixed location for months to focus intensely on developing a product. Employees were expected to execute on this single goal for virtually every waking hour. The Alipay-Tianhong team was no exception— they worked in isolation for about three months to build out the technical, operational and legal aspects of Yu’ebao. Alipay’s goal was ultimate liquidity: to allow users to invest their balances at any point and spend their earnings whenever. To Tianhong, this was unimaginable. Furthermore, Tianhong’s investors usually put in a minimum of 100 or 1000 yuan to buy shares of the fund. But Alipay wanted the minimum to be 1 yuan.
In June of 2013, Yu’ebao was officially brought to the public. Alipay and Tianhong made a joint press announcement and the product had millions of users within days. That year, the traditional Chinese money markets saw high interest rates, which prompted many to choose Yu’ebao to invest their savings. With growing traction and press, Yu’ebao saw monthly growth of 50 billion yuan in investment volume.
As early as 2004, the idea of spinning off Alipay was already in Jack Ma’s vision. Ant Financial was officially established in October 2014. The symbolic meaning behind its name is that everything should start small, focusing on the beauty of the “micro”. Ants are small, but when they come together they can achieve impressive feats. They move towards a shared mission relentlessly.
In an announcement, Jack Ma shared his vision about microfinance. Ant Financial’s goal is to build a fair, transparent and open financial system. Ma claims that their motives are not about making more money because they already have enough. Rather, Ant Financial is the means to a more transparent financial system for China in the next 20 years. From now on, there will no longer be just Alipay. It’s bigger than that.
In 2012, WeChat (China’s primary social media and messaging app) had 100 million daily active users just a year after launch, and was about to enter the mobile payments space with WeChat Pay. Upon identifying the importance of going mobile, Alipay assembled a team of 300 to focus on perfecting their mobile app. These employees were placed in their own building, working around the clock on a single task. Their schedule followed the infamous 996: From 9 am to 9 pm, 6 days a week. Employees brought bedding into the office, and everyone was fervently invested in the goal of capturing a mobile audience.
It was about the time when Alipay was getting ready to go all out on mobile when WeChat released their killer feature of sending red packets （红包） during Lunar New Year. A timeliness tradition, families and friends exchange gift money during China’s most festive holiday season—and they could now do it right in their WeChat messages. This was a giant slap in the face for Alipay as they confronted a formidable competitor in the mobile space.
Alipay decided it wouldn’t make sense to counterattack by going into social, though it did release a feature in 2015 that allowed adding friends on Alipay. The two apps share a large overlap of users, and WeChat was quickly onboarding small businesses and users to send and receive payments through their app. Alipay decided to zero in on a subset of user scenarios, such as shopping and utilities instead of social.
During this period, Alipay also saw its desktop-mobile ratio flip from 70-30 to 30-70.
The “main characters” in Ant Financial’s story are the everyday entrepreneurs of China: A young woman with a vinyl records store, a man with his own design agency, an auntie who runs a noodle shop, or an old man selling agricultural tools. They are self-reliant and don’t settle for mediocrity; they are the backbone of the Chinese economy. But for most of history, these small business owners have had trouble obtaining loans and other forms of financial backing from traditional institutions, often due to a lack of formal collateral. These people are the target users for online banks.
Building a bank has been Jack Ma’s dream since starting Alibaba. On June 19, 2013, the Chinese government released some guidelines about the establishment of private capital and banks. This was an opportunity for Ant Financial to go after a license for its financial services. In 2014, Ant Financial created the Online Merchant Bank of Zhejiang (a province in China). Their goal was to service 10 million small and medium-sized businesses over the next 5 years.
Sesame Credit (芝麻信用) is used to assign credit scores based on big data. In January 2015, Sesame Credit started issuing credit scores (Sesame Score) for the entire Chinese population. They also collaborate with businesses to provide better terms for customers with certain credit scores. For example, an individual with a score of 650 can rent a car from a particular merchant without the need for a deposit. Sesame Credit is being used in consumer finance, lending, home buying, and more. By July 2016, it has helped more than 10 million users gain access to banks and other financial services. It has also helped users with poor credit to re-establish their scores and get access to services that rely on credit.
The culture at Alipay, like many Chinese internet giants, is characterized by the collective. The focus is on the overall company mission rather than the individual. When the company asks you to do something, you usually don’t question it. If it asks you to move to a new city, you pack your bags and go. This is the culture at Ant Financial as well as its parent company Alibaba.
Alibaba has six core pillars: customer first, teamwork, embracing change, passion, integrity, and work ethic. Every three months, employees are evaluated on their performance and adherence to company values.
Alibaba has 3 key numbers: 102, 10 and 1.
102: To be a 102-year old company, crossing three generations.
10: To be among the top 10 e-commerce platforms.
1: If someone wants to do business online, they must use Alibaba.
Mission: To make it so that there are no difficult businesses under the sun (让天下没有难做的生意).
Vision: If you’re a business owner, you must use Alibaba (只要是商人，就要用阿里巴巴).
By the end of 2009, Alipay had 270 million total users, and the daily transaction volume exceeded 1.2 billion yuan. But as with every large scale product, it received user complaints.
At Alipay’s annual holiday party in 2010, there were no festivities or performances. Instead, employees were greeted with an extremely serious and grim meeting. The sounds coming out of the boom boxes were recordings of infuriated customers: “You screwed up my livelihood! I’m never using Alipay again.”
Jack Ma stepped on stage with a stern expression on his face: “Terrible, terrible, terrible to the extreme!”
It was a rude awakening about Alipay’s issues in customer experience. The audience was frustrated and many employees cried. Soon after that, employees went on an offsite retreat to discuss product direction and form stronger bonds with one another. They got drunk together and expressed deep, pent-up feelings. This resulted in a familial bond that further blurred the lines between work and life. They also selected transaction success rate and the number of active users as KPIs.
Another important offsite retreat was the Mount Mogan summit (莫干山会议). Alipay executives gathered at a resort in one of China’s most treasured cultural heritage sites to strategize the future of Alipay. It’s here that the seeds for Yu’ebao and Sesame Credit were planted.
For a Chinese company to “sail” abroad, it can choose from a few approaches:
1. Create its own ship: Dedicate a team to expanding the product overseas (i.e. Huawei)
2. Buy a ship: Acquire a foreign company (i.e. Lenovo)
3. Provide a ship: Sponsor and share your expertise with similar companies abroad
Ant Financial’s approach to globalization is empowering similar companies that are also servicing individuals and small businesses in other regions, while disseminating its own practices.
In February 2013, executives from Ant Financial and Paytm (prominent Indian e-commerce payment system and digital wallet) convened in Hangzhou to formulate a partnership. Following tradition, Alibaba put the Indian team in one of their signature brainstorming sessions that can be mentally and physically challenging. In 2014, Paytm entered the Indian internet finance space by launching e-commerce and a digital wallet. As with many developing countries, India has about 300 million debit cards and 20 million credit cards. It is ripe for financial innovation and inclusion, since a large portion of its population has never been to a bank. Just like China, it has a massive population of more than 1 billion.
Ant Financial made multiple investments in Paytm since 2015. The two companies established a strong collaborative force with cross-company teams focused on exchanging knowledge. When the Indian executives came to China, they first visited the Alipay buildings, then walked out into the streets of Hangzhou. They saw the proliferation of “scan and pay” and were impressed with how many payments can be made at a point of sale in a minute. Now in India, one can also see Paytm’s presence on the streets, big and small.
Ant Financial has also made strategic investments in Thailand’s Ascend Money. Similar to the partnership with Paytm, Ant Financial hopes to provide its expertise and replicate its practices in Thailand. In the next five years, the goal is for Thailand’s users to make payments online and offline, of any amount. They should also be able to use their phones for shopping, food, utilities, and rides.
The ability to leave your house without a wallet is quickly spreading throughout Asia, largely driven by Ant Financial’s strategic partnerships with regional payment innovators. Ant Financial continues to advocate for the “micro” in both the user and functionality sense.
Although China has been criticized for copying many apps and software, it is the de facto leader in mobile payments whose services run at an unprecedented scale. But perhaps what’s most exciting is that it is just one of many fintech innovators—such as Paytm, Ascend Money and Nubank—bringing financial inclusion to the developing world.
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